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Hello
In this question, Coatmin gave a financial guarantee contract on behalf of one of its subsidiaries (loan amount is 60mil). The FV of the contract is 1.2 mil and the loan period is 3 years. Amortisation of the contract is straight line so it’s 0.4 mil each year.
In the answer, it mentions that the sub paid the 1st year thereby remaining with a balance of 40m. It also mentions that the amortisation is reversed at the 2nd year since the sub eventually got a donation to make its payments.
I do not understand:
1. why the 0.4 is taken away from the 40 mil. I thought it would have been taken away from the 1.2 since that was the basis for calculation.
2. why the 0.4 is reversed after receiving the donation. In my opinion whether Coatmin had to pay the amount or not , there would still be amortisation.
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